In Lake Imaging, LLC v. Franciscan Alliance, Inc. f/d/b/a Saint Margaret Mercy Health Centers (20A-CT-1490 (IN 2021)), an Indiana hospital system sued its own radiologists under an indemnification clause contained in a staffing contract between the parties. A ruling from the Indiana Supreme Court provides some important learning points for physicians choosing to agree to contractual indemnification.
Lake Imaging, LLC v. Franciscan Alliance Background
Franciscan Alliance, Inc., a nonprofit organization operating multiple hospitals in Illinois and Indiana including St. Margaret Mercy Health Centers in Hammond, IN and Dyer, IN. Franciscan entered into an independent contractor agreement with Lake Imaging, LLC for provision of radiology services at several Franciscan Alliance hospitals. The contract included an indemnification clause stating the following:
[Lake Imaging] agrees to indemnify and hold [Franciscan] harmless from any liability claimed as a result of [Lake Imaging’s] negligence in the provision of services undertaken under this agreement.
In 2011, a Franciscan patient underwent two brain CT scans interpreted by Lake Imaging radiologists. Those radiologists failed to identify a subdural hematoma and the patient subsequently died. The patient’s family sued Franciscan but did not sue Lake Imaging or the radiologists. Franciscan Alliance ultimately paid $187,000 to settle the lawsuit with the patient’s family.
Nearly two years later, Franciscan demanded indemnification from Lake Imaging. When Lake Imaging did not respond, Franciscan sued Lake Imaging for breach of contract for failing to provide “competent medical care” and for failing to indemnify Franciscan “for any and all costs, expenses, damages and judgments that are imposed upon or incurred by [Franciscan] in this matter as a result of any negligence of Lake Imaging or its employed physicians[.]” Franciscan also sought a declaratory judgment requesting that the court force Lake Imaging’s insurer to pay costs, expenses, and any judgment in the claim Franciscan filed against Lake Imaging.
The trial court dismissed the case, holding that it had no jurisdiction over the claim because Franciscan did not follow the proper protocol for filing the claim. Because Franciscan’s claim involved allegations of medical malpractice against Lake Imaging, the court ruled that Franciscan had to first present the claim to the Indiana Department of Insurance as is required under the Indiana Medical Malpractice Act. Lake Imaging also alleged that the 2 year statute of limitations for a medical malpractice action had expired, making Franciscan’s lawsuit untimely.
Lake Imaging, LLC v. Franciscan Alliance Appeal
On appeal, Franciscan argued that its claim against Lake Imaging was not for medical malpractice, but was rather was a straightforward contractual liability claim. Franciscan alleged that Indiana’s Medical Malpractice Act only allows medical malpractice actions to be brought by “injured patients or their representatives” and therefore Franciscan was not subject to the requirements in the medical malpractice statute. Lake Imaging argued that Franciscan’s claim clearly alleged that Lake Imaging’s radiologists failed to provide “competent medical care,” and therefore the claim was for medical negligence.
The Indiana Court of Appeals ruled that the language in the Indiana Medical Malpractice Act referencing “claimants” rather than “patients” showed that the legislature intended that the Act encompass more than just patients and their representatives. Since an indemnification claim does not occur until an indemnified party has suffered a loss, the Appellate Court’s holding could require that indemnified parties sue before an obligation to indemnify existed. However, the Appellate Court ruled that Indiana Trial Rules allow an indemnification claim to be litigated along with an injured party’s claim. The Appellate Court also agreed with the trial court’s holding that Franciscan failed to follow proper procedural requirements in filing a malpractice claim against Lake Imaging. Although Franciscan’s claim would have been barred by the statute of limitations, the trial court correctly dismissed Franciscan’s claim because Franciscan’s failure to follow the requirements in the Medical Malpractice Act left the court without jurisdiction in the case.
Franciscan then petitioned the Indiana Supreme Court to hear the case and Franciscan’s petition was granted.
Lake Imaging, LLC v. Franciscan Alliance Supreme Court ruling
In its March 2022 ruling, the Supreme Court disagreed with the lower courts’ interpretation of the Indiana Medical Malpractice Act, holding that only those who have claims “for bodily injury or death on account of malpractice” are required to follow the Act’s requirements. Franciscan’s breach of contract claim, the Court ruled, did not fit that definition. Because Franciscan’s claim was not a medical malpractice claim, the two year statute of limitations did not apply and Franciscan’ lawsuit against Lake Imaging was timely filed. The Supreme Court also disagreed with the Appellate Court’s notion that, to preserve their rights, those who might seek indemnification may have to sue before a claim may have even existed – turning a “collaborative role of independent healthcare providers into an adversarial one.” The Court therefore reversed dismissal of Franciscan’s contract claim and remanded the case to the trial court for further consideration of that claim.
The Supreme Court made no ruling on whether Lake Imaging’s malpractice insurer, ProAssurance, would have to cover any judgment against Lake Imaging. ProAssurance argued that breach of contract claims are not acts of medical malpractice and are therefore not covered events under Lake Imaging’s malpractice policy. Instead of ruling on this issue, the Supreme Court sent the case back to the trial court to determine whether ProAssurance would be required to pay any potential judgment entered.
Lake Imaging, LLC v. Franciscan Alliance Indemnification Takeaways
- The Court of Appeals’ opinion was a bit of a stretch. The Indiana law that requires potential medical malpractice claims to be submitted to a medical review panel gives potential malpractice victims an idea of whether a claim has merit. While Franciscan did allege that Lake Imaging’s radiologists committed malpractice, Franciscan wasn’t realistically a potential victim of medical malpractice. I think the Court of Appeals focused too closely on isolated wording in the statute to come to its opinion rather than considering the overall intent of the statute.
- I agree with the Supreme Court that requiring parties to sue for indemnification before a claim even exists is unreasonable. Such a holding would require that parties be named in lawsuits and to pay to respond to those lawsuits even if no claim came to fruition. I don’t think the Court of Appeals considered that individual physicians who are naive enough to agree to indemnification could be forced to defend multiple unnecessary lawsuits if its decision was upheld.
- The Supreme Court’s insight that enforcing indemnification would turn a “collaborative role of independent healthcare providers into an adversarial one” is spot on. Franciscan Alliance should have informed patients that medical services were performed by independent contractors. Doing so would have been a defense to the medical malpractice lawsuit filed against Franciscan. Franciscan then sued Lake Imaging to try to cover for Franciscan’s own shortcomings. How does Franciscan think those actions will appear to the rest of its medical staff? Future radiology groups would certainly consider Franciscan’s willingness to sue its physicians when deciding whether to work at Franciscan facilities. The whole situation just doesn’t create good optics for the Franciscan Alliance.
- There is no way that Franciscan will convince a trial court that ProAssurance should be forced to pay for a judgment in a contractual dispute that Franciscan admits it filed against the radiologists. As ProAssurance argued, contractual liabilities are not acts of medical malpractice and are not covered under a medical malpractice policy. Lake Imaging and its radiologists will be forced to pay any judgment for indemnification out of their own pockets.
- The interesting thing about Franciscan’s failure to inform patients that medical services were being performed by independent contractors is that if Franciscan provided this information to the patients, Lake Imaging would likely have been named as a co-defendant in the malpractice suit. ProAssurance would then have been required to cover any costs of defense and any malpractice judgment. In effect, Franciscan’s failure to inform turned a collectible claim into a non-collectible claim. This is something that Lake Imaging’s attorneys will likely argue in the trial court.
- Had the contract between Franciscan and Lake Imaging contained a mutual indemnification clause, Lake Imaging would have been able to assert an indemnification claim against Franciscan for Franciscan’s failure to inform patient of the independent contractor status. The result in such a case would likely have been a wash.
Is it starting to sink in that indemnification in medical contracts is a bad thing? Malpractice insurance applications are even beginning to ask if physicians have agreed to indemnification. Do you wonder why that is?
Don’t agree to indemnification
Want more information about indemnification? Check out the Indemnification section of my blog.
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